Even with the unemployment rate having fallen sharply in recent years, the U.S. job market is far from the best that workers have ever seen. Especially as you get older, the chances of being laid off and forced into early retirement grow, and many companies have looked to trim labor costs by offering early retirement packages in order to replace highly paid older workers with less experienced, lower-paid employees.
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Those early retirement packages can look enticing, especially when you consider that most workers aren't entitled to anything at all from an employer that chooses to let them go. Yet before accepting an early retirement offer, you should get some answers about the plan and how it will affect your specific financial situation. Let's look at three of the most important questions to ask about an early retirement package.
1. How is the early retirement package structured?
Typically, early retirement packages include severance pay that provides the primary incentive for you to take the offer. Packages will generally provide a certain number of weeks of pay for every year you've worked at a company, while some companies offer fixed severance amounts that don't vary based on how long you've been an employee there.
In assessing whether an early retirement package is big enough to meet your needs, planning for the worst-case scenario can be helpful. If the package includes enough severance pay that you can transition to your expected retirement comfortably, then accepting it becomes a lot easier. Otherwise, you might have to count on being able to get another job in order to bridge the gap to your expected retirement age.
Moreover, how you get severance payments can have a big impact as well. An up-front lump sum can give you maximum flexibility to save and invest to stretch your financial resources as far as possible, but it can also greatly increase your taxable income in the year you receive the money. Receiving the severance in regular payments every pay period doesn't give you that flexibility, but it can make budgeting easier and reduce the tax impact. Also, keep in mind that the IRS will collect payroll taxes on the amount just as if it were regular pay, so your take-home pay will be less than what is stated in your offer.
2. Will the early retirement package affect your pension or other benefits?
Those fortunate enough to get severance offers also often have pension benefits. What you receive from a pension often depends on your age, how many years you have worked, and what your average or peak earnings were during your time at your job. Therefore, if you take early retirement, you might end up with a smaller pension than you would have received if you had worked all the way to full retirement age.
Some early retirement packages include provisions that effectively give you extra credit for the years you would have worked, preventing any reduction in your pension benefits. Even though that won't affect the cash you receive right now, you should still take it into account in assessing whether an offer is acceptable.
3. Is health insurance included in the early retirement package?
Most Americans rely on their employers for health insurance coverage, so it's important to know how you're going to handle healthcare costs if you accept early retirement. Without assistance from your employer, you can end up footing a very expensive bill for coverage, especially given the high rates that people in their late 50s and early 60s pay compared to younger workers. The premiums alone for health insurance can quickly eat up the severance pay you receive in an offer.
Ideally, your offer will include provisions to remain on company-provided health plans, with cost-sharing terms similar to what you paid as an employee. Barring that, you have to estimate actual costs of healthcare and ensure that you'll still end up ahead taking a deal -- or seek out another job to get the healthcare coverage you'll need.
In today's cutthroat economy, even being offered an early retirement deal is far from certain. But don't just accept an early retirement package before you know whether it will bridge the gap to full retirement. That way you can make the most informed choice possible.
